The Morning Hark - 18 Mar 2024
Today’s focus...BoJ on the cusp? A fun packed Week Ahead.
Overnight Highlights
Prices are at 7.00 GMT/3.00 EST, with changes reflecting movement from midnight GMT
Oil - Oil up smalls in Asia with Brent and Crude May futures trading at 85.70 and 81 respectively. Today saw consolidation from the near 4% rise we saw in the sector last week on the back of expectations of a tightening in supply and further attacks on Russian energy installations which some experts estimate at affecting nearly 10% of Russian capacity.
EQ - Asian equity markets mixed with little change for the Hang Seng as it trades up smalls at 16,770. However the Nikkei sees an over two percent climb to 39,510. The move was relatively broad across all sectors and this despite expectations for a rate rise out of the BoJ tomorrow. It would seem that a hike is an endorsement from the authorities of a stronger Japanese economic landscape moving forward as well as the much muted wage hikes will help to fuel consumer consumption.
The US indices up smalls in Asia with the S&P and Nasdaq futures currently at 5200 and 18,165 respectively.
Gold - Gold off smalls in Asia with April futures currently trading at 2151 as it continues to feel the pressure from the firmer USD.
FI - Global yields softened a touch in Asia after last week’s gains with the US2y and US10y futures yields currently at 4.72% and 4.29% respectively.
European yields ended the week firmer with the German 10y at 2.44% and the Italian 10y yield at 3.70%.
UK gilt 10y similarly at 4.20%.
FX - FX in Asia doing little. The USD Index currently at 103.45 and holding onto its gains from late in the week. The majors; JPY, EUR and GBP currently at 149.20, 1.0890 and 1.2735 respectively.
Today’s FX option expiries today in the JPY $1.2bn at 149. In the EUR we have €3.5bn at 1.09.
Others - Bitcoin and Ethereum has had an interesting weekend after the sell off we saw on Friday. Those weekend Asian red candles made an appearance again which saw Bitcoin trade close to 65,000. Since then we have seen a decent recovery. The pair currently at 68,450 and 3630 respectively.
One thing we have noticed of late is the Asian session has generally dominated the price action with any move for the sector coming in that time zone with the other two sessions generally about consolidation. Lets see if that lasts.
Macro Themes At Play
Recap
US NY Empire State Manufacturing Index for March came in at -20.9. Not the best!
US Industrial Production for February was pretty much in line with the MoM coming in at 0.1% taking the YoY to -0.2%.
US Manufacturing Production for February a touch firmer than expected with a rise of 0.8% MoM, its best since April. The YoY now standing at -0.7%.
US Michigan Consumer Sentiment for March showed a small decline to 76.5. US Michigan Inflation Expectations as expected at 3% whilst the 5y Inflation Expectations remain at 2.9%.
BoJ Watch
Rengo wage settlement for FY2024 set at 5.28% (3.8% last) the highest in over 30 years. Enough to tip the BoJ?
Overnight the Nikkei has reported that the BoJ conducted a “gensaki” operation for the first time in a month. This is a reverse repo operation using JGBs as collateral. Due to upward pressure on the JGB market this was seen as preparation for a move in rates tomorrow.
Central Bank Speakers
ECB’s Vujcic prefers 25bp cuts but claimed it was too early to set the pace.
The Week Ahead
If we don’t get some market volatility with this week’s line up I guess we pack our bags and go home!
BoJ Interest Rate Decision. Main focus for the week is the BoJ meeting and will this be the one, after eight years of negative rates, to see Japan return to a positive, or at least zero, rates? If the leaks in the Nikkei and Jiji news services are to be believed then yes as they have been full of headlines proclaiming that the BoJ members are readying themselves for such an event. If so then this would be the first rate rise for Japan in 17 years. However the flip side, lead by Governor Ueda’s latest dovish comments, would suggest otherwise. He recently proclaimed that the BoJ was “not yet in a position to foresee the achievement of a sustainable and stable inflation target”. If they go I guess he will face some tricky questions; after 8 years what has changed his mind in 2 weeks? Whatever happens rates seem set to move higher in either March or April. March is favoured on the back of the first wage deal announcements which point to a general consensus of over 5% wage hikes. In addition a hotter profile for CPI is expected, with this week’s print for February YoY getting close to 3%. April’s arguments centre around the fact its the start of the new financial year, government fuel subsidies will end giving a further “boost” to inflation and the BoJ will release a new set of economic projections. In addition there is still an economic hangover from the earthquake back in January. If they do go this week what to expect? Consensus seems to be gathered around a 10bp hike. YCC are also expected to go but will they go cold turkey or offer the markets some methadone? Some have pointed to them offering a package of buying a fixed amount of bonds rather than targeting a yield level to avoid any market turbulence and an unwarranted spike in rates. Alternatively they continue to buy with a commitment to slowly decrease the amount of purchases and a commitment to not reinvest proceeds. Finally do they just cease from buying but commit to intervening as and when necessary? There is also the small matter of the risky asset purchases (ETFs and Real Estate Funds) which again will probably cease. On forward guidance again any mention of the massive stimulus package to achieve the 2% target will probably be removed but an accommodative stance will be retained for the time being. One things is for sure, not matter what they do this week the BoJ are not going on a long rate hiking program its going to be very slow and steady. Buy the rumour sell the fact!
RBA Interest Rate Decision. Expectations are for the RBA to remain on hold, although there is a small corner of the market looking for a cut. Indeed there is quite a spread in expectations with a roughly 25% chance they cut this week but a full cut is not in the price until September which seems quite a large calendar spread, especially given there are 5 RBA meetings in this period. The minutes from the last meeting alluded to them discussing a further hike whilst eventually deciding to remain on hold. Since then however Bullock has been less hawkish maintaining that inflation doesn’t have to get to the 2/3% target band for the RBA to cut and if consumption slows more quickly than anticipated they would cut rates. However, thus far, both growth and inflation are steady and above forecast. They retained a tightening bias although very much watered down from prior statements. Do they take this out all together or does that give the market too much encouragement to price in more and quicker rate cuts? Whilst not the most exciting of central bank meetings there does feel like there is something to play for. On hold with a removal of the tightening bias but maybe a nod to higher for longer to temper the market.
Canada Inflation Report. The BoC have referred to the Canadian inflation profile, going forward, as being “gradual, uneven and with upside risks”. Macklem has gone further with his expectations pointing to a close to 3% level through the middle of this year and easing in the second half of the year although not hitting 2% target this year. Indeed expectations are for a slight uptick for headline which will take it back above 3% after last month’s welcome dip below. Ultimately nothing to see here from a markets or BoC point of view.
China Interest Rate Announcement. Last week saw the Chinese hold the MLF rate steady and this week sees the Loan Prime Rate announcement where both the 1y and 5y are expected to be held steady. Remember last month they cut the 5y by 25bps in a move to help the property sector. No change is expected despite the PBoC Governor Pan suggesting that there was room to cut the RRR although analysts suspect that this is more of a H2 story. One further point to note was last week’s technical move where the Chinese authorities used the Medium Term Lending Facility to drain liquidity from the banking system for the first time in 18 months.
UK Inflation Report. It’s all about the services inflation measures and wage growth for the BoE although expectations are for a further decline in both headline and core to below 4% and 5% respectively. Indeed the profile for this measure is to see an aggressive drop into the middle of the year to hit 2%. This is just another milestone on that journey.
FOMC Interest Rate Decision and Economic Projections. The latest important data prints, inflation and NFP, have left the Fed in a “not angry, just disappointed” zone and surely in a “too hot to cut” predicament. We expect an on hold decision with Powell retaining his cautious stance that we have seen of late from him and indeed most of his committee colleagues. The main focus will be on the new set of projections and in particular those famous dots. Remember back in December we saw the Fed pivot slightly to a more dovish stance with the dots predicting three cuts this year and four next. Given the latest big data prints, and the recent deliberations from the Fed speakers, the risk is that the 2024 dots get trimmed to just two cuts. Back at the tail end of last year we were fully priced for a 25bp cut at this meeting and indeed a peak of 170bps of cuts for the year! Seems like a lifetime ago with us barely hitting 75bps now. Indeed over the last week we have seen a rise in the two year of 35bps its biggest weekly jump since May. Given this backdrop if we see the Fed retain the three cuts for this year we would expect this rally to unwind. The other big point of note will be any discussion on QT and specifically the balance sheet reduction. Can this be done as the Fed enter a period of rate cuts? Equally can this be achieved without disturbing the level of ample reserves? Maybe we get some more colour on Waller’s suggestion surrounding duration. Will the Fed start to invest more in the short end at the expense of the long end?
Flash PMIs. First look at March’s activity in the major economies start to dribble out into the latter part of the week. Pretty much all are expected to tick up smalls and slowly drag both measures back into growth. As a reminder, other than the US which sees both manufacturing and services in growth and Germany which sees both measures in contraction, the major economies have the services sector in growth whilst their manufacturing sectors remain in the doldrums.
SNB Interest Rate Decision. Outwith the BoJ, this is the meeting with the most intrigue and indeed the one with the most likelihood of a rate change. About a third of the market is looking for a rate cut from the Swiss at their first meeting of the year and indeed the first since Chair Jordan announced that he was stepping down. The CPI profile has taken a sharp turn. It has been back in its 0/2% band since June but has dipped considerably since the start of the year to a point in February where it sits at 1.2%. For reference the SNB forecast is 1.8%. Do the SNB sneak a run on the ECB and cut rates? Remember they will not meet again until June by which time the ECB will have met a further twice.
Norges Bank Interest Rate Decision. Unchanged by a country mile is the market’s expectations with little change to the future rate path expected too. The backdrop is a softer inflation profile driven by lower food prices but its still around the 5% level and too high. In addition the quarterly regional surveys have pointed to an increase in activity and a tick up in wage growth. Finally the NOK is stronger than forecast on the back of higher oil . All in all its a “steady as she goes” and let’s be patient.
BoE Interest Rate Decision. Another on hold decision imminent and, given there is no press conference and only the minutes, the vote split looks to be the most interesting part of this showpiece. Remember last month the split was 2-6-1 for a hike, hold and cut. Will we see a hawk crumble? Do Haskell and Mann have enough of “their evidence” to fold as they have witnessed wage growth and inflation cool? Equally does Dhingra get some company on the rate cutting step? The other point of note will be on the statement. Last month’s saw the Bank drop their tightening bias but they have retained the “restrictive for sufficiently long and for an extended period” language. Do they remove this? Seems unlikely especially as Bailey recently noted that rates would remain restrictive even if the Bank cut rates. One final point to note was last year’s April and May inflation reports showed a re-acceleration due to seasonal and technical factors will this serve as a handbrake for the BoE as they remain cautious going into the late Spring? As things stand June remains 50/50 for the first cut with a full cut not priced in until August.
Japan Inflation Report. Bit of an “after the Lord Mayor’s show” about this print given all the fireworks expected out of the BoJ earlier in the week. Expectations are for the YoY print jump from last month’s 2% to be almost knocking on the door of 3% this month. Probably of more significance will be the second tally of votes for the Rengo trade talks which will be announced on Friday. For reference there is a third one in the first week of April and the final tally in June.
The Day Ahead
China Data Dump for January/February saw a general uptick in activity with retail sales and industrial production easily beating expectations. Retail Sales YoY rose 5.5% a drop from the previous period but beating expectations. Industrial Production YoY showed an almost 2 year high at 7% growth. However the Unemployment Rate ticked up to 5.3%. Couple of other pointers were a good increase in Fixed Asset investment of 4.2%. However the property sector again showing signs of weakness with a 20.5% fall in sales.
For reference the figures are for the January February period, so a two month data catch to smooth out the moveable Lunar New Year holiday period which can fall in either month.
Just printed Norway GDP MoM for January showed 0% growth, a third consecutive month of economic decline for the country.
Little else to start the week other than the final EU Inflation Report for February.
However we have a busy overnight session with the BoJ and RBA rate announcements.
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Main Highlights Ahead
All times in GMT (EST+4 / CET-1 / JST-9)
The main highlights for the week ahead ahead in terms of data and speakers:
Monday
EU Inflation Rate MoM Feb Final consensus 0.6% vs previous -0.4% (10.00 GMT)
EU Inflation Rate YoY Feb Final consensus 2.6% vs previous 2.8% (10.00 GMT)
EU Core Inflation Rate YoY Feb Final consensus 3.1% vs previous 3.3% (10.00 GMT)
ECB Speakers
Buch (10.15 GMT)
Tuesday
BoJ Interest Rate Decision expectations for a 10bp hike ending negative rates (03.00 GMT)
RBA Interest Rate Decision expectations for rates to remain on hold at 4.35% (03.30 GMT)
RBA Press Conference (04.30 GMT)
Japan Capacity Utilisation MoM Jan consensus % vs previous -0.1% (04.30 GMT)
Japan Industrial Production MoM Jan Final consensus -7.5% vs previous 1.4% (04.30 GMT)
Japan Industrial Production YoY Jan Final consensus % vs previous -1% (04.30 GMT)
EU ZEW Economic Sentiment Index Mar consensus vs previous 25 (10.00 GMT)
EU Labour Cost Index YoY q4 consensus % vs previous 5.3% (10.00 GMT)
EU Wage Growth YoY q4 consensus % vs previous 5.3% (10.00 GMT)
Germany ZEW Economic Sentiment Index Mar consensus 20.1 vs previous 19.9 (10.00 GMT)
Canada Inflation Rate MoM Feb consensus 0.6% vs previous 0% (12.30 GMT)
Canada Inflation Rate YoY Feb consensus 3.1% vs previous 2.9% (12.30 GMT)
Canada Core Inflation Rate MoM Feb consensus % vs previous 0.1% (12.30 GMT)
Canada Core Inflation Rate YoY Feb consensus % vs previous 2.4% (12.30 GMT)
US Building Permits Feb Prel consensus 1.5m vs previous 1.489m (12.30 GMT)
US Housing Starts Feb consensus 1.435m vs previous1.331m (12.30 GMT)
ECB Speakers
de Guindos (08.30 GMT)
Wednesday
China Loan Prime Rate 1y consensus for rates to remain on hold at 3.45% (01.15 GMT)
China Loan Prime Rate 5y consensus for rates to remain on hold at 3.95% (01.15 GMT)
UK Inflation Rate MoM Feb consensus 0.7% vs previous -0.6% (07.00 GMT)
UK Inflation Rate YoY Feb consensus 3.6% vs previous 4% (07.00 GMT)
UK Core Inflation Rate MoM Feb consensus % vs previous -0.9% (07.00 GMT)
UK Core Inflation Rate YoY Feb consensus 4.6% vs previous 5.1% (07.00 GMT)
BoC Summary of Deliberations (17.30 GMT)
FOMC Interest Rate Decision expectations for rates to remain on hold at 5.5% (18.00 GMT)
FOMC Economic Projections (18.00 GMT)
FOMC Press Conference (18.30 GMT)
NZ GDP Growth Rate QoQ q4 consensus 0.1% vs previous -0.3% (21.45 GMT)
NZ GDP Growth Rate YoY q4 consensus 0.1% vs previous -0.6% (21.45 GMT)
Australia Judo Bank Manufacturing PMI Mar Flash consensus vs previous 47.8 (22.00 GMT)
Australia Judo Bank Services PMI Mar Flash consensus vs previous 53.1 (22.00 GMT)
Japan Reuters Tankan Index Mar consensus vs previous -1 (23.00 GMT)
Japan Balance of Trade Feb consensus JPY-810.2bn vs previous JPY-1758.3bn (23.50 GMT)
Japan Exports YoY Feb consensus 5.3% vs previous 11.9% (23.50 GMT)
Japan Imports YoY Feb consensus 2.2% vs previous -9.6% (23.50 GMT)
ECB Speakers
Lagarde (08.45 GMT)
Lane (09.30 GMT)
Schnabel (13.45 GMT)
Thursday
Australia Employment Change Feb consensus 40k vs previous 0.5k (00.30 GMT)
Australia Unemployment Rate Feb consensus 4% vs previous 4.1% (00.30 GMT)
Japan Jibun Bank Manufacturing PMI Mar Flash consensus vs previous 47.2 (00.30 GMT)
Japan Jibun Bank Services PMI Mar Flash consensus vs previous 52.9 (00.30 GMT)
Germany HCOB Manufacturing PMI Mar Flash consensus 43.3 vs previous 42.5 (08.30 GMT)
Germany HCOB Services PMI Mar Flash consensus 48.8 vs previous 48.3 (08.30 GMT)
SNB Interest Rate Decision expectations for rates to remain on hold at 1.75% (08.30 GMT)
EU HCOB Manufacturing PMI Mar Flash consensus 47 vs previous 46.5 (09.00 GMT)
EU HCOB Services PMI Mar Flash consensus 50.5 vs previous 50.2 (09.00 GMT)
Norges Bank Interest Rate Decision expectations for rates to remain on hold at 4.5% (09.00 GMT)
Norges Bank Monetary Policy Report (09.00 GMT)
UK S&P Global Manufacturing PMI Mar Flash consensus 47.8 vs previous 47.5 (09.30 GMT)
UK S&P Global Services PMI Mar Flash consensus 54 vs previous 53.8 (09.30 GMT)
BoE Interest Rate Decision expectations for rates to remain on hold at 5.25% (12.00 GMT)
MPC Meeting Minutes (12.00 GMT)
US Philadelphia Fed Manufacturing Index Mar consensus -2.5 vs previous 5.2 (12.30 GMT)
US Philly Fed Employment Mar consensus vs previous -10.3 (12.30 GMT)
US Philly Fed New Orders Mar consensus vs previous -5.2 (12.30 GMT)
US Philly Fed Prices Paid Mar consensus vs previous 16.6 (12.30 GMT)
US S&P Global Manufacturing PMI Mar Flash consensus 51.7 vs previous 52.2 (13.45 GMT)
US S&P Global Services PMI Mar Flash consensus 52 vs previous 52.3 (13.45 GMT)
BoC Gravelle Speaks (13.50 GMT)
US Existing Home Sales Feb consensus 3.95m vs previous14m (14.00 GMT)
Japan Inflation Rate MoM Feb consensus % vs previous 0% (23.30 GMT)
Japan Inflation Rate YoY Feb consensus % vs previous 2.2% (23.30 GMT)
Japan Core Inflation Rate YoY Feb consensus 2.8% vs previous 2% (23.30 GMT)
Fed Speakers
Barr (16.00 GMT)
ECB Speakers
Buch (08.00 GMT)
Friday
RBA Financial Stability Review (00.30 GMT)
UK Retail Sales MoM Feb consensus -0.3% vs previous 3.4% (07.00 GMT)
UK Retail Sales YoY Feb consensus -0.8% vs previous 0.7% (07.00 GMT)
Germany Ifo Business Climate Mar consensus 85.9 vs previous 85.5 (08.00 GMT)
Germany Ifo Current Conditions Mar consensus 87 vs previous 86.9 (08.00 GMT)
Germany Ifo Expectations Mar consensus 84.6 vs previous 84.1 (08.00 GMT)
Canada Retail Sales MoM Jan consensus -0.4% vs previous 0.9% (12.30 GMT)
Canada Retail Sales YoY Jan consensus -0.4% vs previous 2.9% (12.30 GMT)
Fed Speakers
Barr (16.00 GMT)
Bostic (20.00 GMT)
ECB Speakers
Buch (13.15 GMT)
Lane (17.00 GMT)
Good luck.
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